The S&P 500 is now up nearly 71% from the March despite the less than spectular economic news.
Much money has been moving back into the stock market which is troubling. It was to be expected that many investors would jump into the market near the March lows to pick up stocks at low prices. However, now many stocks are priced very high considering the poor fundamental outlook for the future.
Many of the real estate related bubble jobs will not come back and it will take several years before many of these displaced and downsized workers find alternative jobs. This may be three years or more before the unemployment starts to turn around.
A result of this is uncertainty and uneasiness in the American market for consumer and business spending that has lead to a record high savings rate in an economy that is dependent on consumer spending and not exporting.
The result of this is going to be weak corporate profits and most likely depressed stock prices. Right now, the stock market does not appear to be reflecting this but it will most likely within a few years or less from now.
The US deficit will continue to grow over the next few years as the goverment continues try to spend money stimulating the economy and by providing states and individuls with stimulus and unemployment related loans.
Much of this money going to pay for unemployment benefits is not going into public works projects that will help the economy more productive but is simply going to pay for people to look for jobs that will probably not appear for a few years.
The US goverment will need to continue to find investors to finance the deficits and investors will most likely want a higher interest rate considering the rapid increase in the deficit and weakening dollar.
The result of this is that US bond yields are going to rise which will make bonds more attractive to investors. Money will move from the stock market into the bond market as investors look for safe haven as well as higher yields.
The stock market will continue to go down as a result of rising bond yields, poor corporate profits and poor economic news such as the second level of foreclosures brought on when adjustable rate mortagages rise possibly moving upwards to 9%.
There is also uncertainy in the commercial real estate market regarding defaults and losses. These losses may lead to many large financial companies and banks continuing to fail and possibly the goverment stepping in once again and bailing out firms.
Out of all of this poor news there will be some obvious things that investors will be able to profit from.
- Stock market moving lower
- Treasury yields rising
- Second wave of foreclosures
- Weakening dollar
- Commodity prices increasing
Each one of these events can be profited from. Stock market ETF's exist which increase in value as the stock market goes lower. Treasury ETFs exist that increase in value as the treasuries decrease in value.
Increasing foreclures will put a downward pressure on house and commerical properties giving opportunity to purchase homes or real estate at simlar or possibly lower values than today. This may be especially attractive for cash investors.
An alternative to outright real estate investments is to invest in an inverse real estate ETF. These types of ETF's are are new and not very popular considering that real estate prices are still low by historic standards. As a result, outright investmenting in real estate will be more attractive.
One can profit from the weaking dollar by purchasing currency ETF's that invest in other currencies other than the dollar.
Commodity index ETFs will allow the investor to invest in agriculture, metals and energy. Agriculture seems to be the most attrictive one here as metals have moved up significantly already and oil is generally more tied to economic activity. As people drive less and factories close, oil becomes less attractive. Agriculture has not moved up as much as the others and should generally fair better in a poor economy because people will still continue to eat food.
Gold ETFs exist also but gold has moved up beyond it's practical value. Now the value of gold prices are more dependent on speculators buying gold rather than industrial or consumer use of gold. As a result, gold should be avoided as it is now speculative and will most likely fall over the next several years.
Inverse gold ETFs will help with this but expect that your investment may lose money for a few years because speculators may continue to put money into gold, increasing its value before it finally goes back down.
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